India’s recent economic success inevitably raises the question of where the country might be heading. The answer is that with a little luck and good management it could well make the 21st century the Indian Century. Here’s how.
Some will object that China’s economy is already twice as large as India’s and growing faster. True, and there is, no doubt that China will be the big story for the next 15 years. Thereafter, however, things will change as China’s two major problems increasingly weigh on the economy. Pervasive corruption is increasingly expensive and virtually impossible to eradicate under China’s authoritarian political system. At the same time, rapid ageing and eventual population decline will manifest itself in about 15 years as a consequence of the one-child policy. China is now in a race to get rich before it becomes old. The outcome is very much in doubt, but even if it succeeds in getting rich in time, it will have difficulty in staying rich as the burden of caring for the old becomes crushing.
India also suffers from the ills of corruption, but its democratic system provides a self-cleansing mechanism. Of course, India will have to be careful to maintain and improve its democracy. But the incentive to do so will be less corruption and faster growth. Beyond this, India’s favourable demographics will provide a huge push in the later half of the century. By about 2035, India’s population will become larger than China’s and will go on to reach about 1.6 billion as the Chinese population contracts.
Moreover, India will remain a young country as the costs of caring for the elderly become crushing in China and other societies.
In this regard, one key policy element must be to reverse the growing imbalance between male and female births in India. Secondly, of course, jobs with good and rising wages must be created for all the new people.
So far, India’s success has been driven largely by information and communications technologies and service industries. They will have to continue their drive but, alone, they are not likely to create the jobs necessary to deepen and broaden the Indian success story. Getting to the next level will mean that India must become a manufacturing powerhouse comparable to China. That will require many things such as better infrastructure, more and better education, reduction of regulatory barriers, and improvement of labour relations.
But there are two key strategic factors. The Asian Tigers such as Singapore, Taiwan and now China have all made liberal use of tax holidays, capital grants, and other investment incentives to induce foreign companies to move factories to their shores. India must do the same while extending similar inducements to critical investment by domestic manufacturers. Some may object that such policies will distort markets. But since the markets are already very imperfect and subject to many kinds of intervention from both domestic and foreign agents, such positive investment measures will be necessary to overcome the pre-existing distortions. On this, the record of Ireland, Singapore, China and many others is clear. Investment incentives work.
Japan remains the world leader in manufacturing process technology and at the same time, has an uneasy relationship with China. Japanese manufacturers remain cautious about transferring production and technology to China, where the risk of copying and adverse administrative guidance is high. India should strive to forge a partnership with Japan and Japanese companies to become an alternative to China as a location for low-cost, high-quality manufacturing.
To become a manufacturing superpower, India must also insist on a halt to mercantilist currency management by Japan, Korea, China and others. Most export led economies such as these strive to maintain an undervalued currency as a way of promoting exports and of protecting domestic markets from imports. India cannot afford to allow its competitors to determine the value of its currency and hence the flow of its imports and exports—and thus the future of its manufacturing industries. On the one hand, India must object to, and use its influence in the World Trade Organization and elsewhere to bring a halt to, such practices. On the other hand, it must not allow its own currency to float freely until its competitors do so.
India should also seriously consider applying for membership in the North American Free Trade Agreement (Nafta). The gigantic US current account deficit is increasingly unsustainable and is generating protectionist pressure across a broad range of industries in the US. By joining Nafta, India could assure itself guaranteed free access to the North American market in a move that neither China nor Japan nor even Korea could, or would, be able to make. In effect, India would gain preferential access to the world’s most important market.
Development, of course, generates its own problems. For India as for China, the challenges of how to deal with pollution, growing water scarcity, greenhouse gas emissions, and adequate energy supplies will be daunting. Yet there is one simple solution to all these problems that India must adopt—nuclear power. It is clean with regard to air pollution, can drive desalinization plants efficiently, emits no greenhouse gases and replaces oil, coal and natural gas as power sources. India should adopt a policy like that of France, to generate the bulk of its electric power from nuclear plants.
With these policies and a little luck, India will become the world’s biggest economy and leading developer of technology, gradually replacing the US as the dominant country of the 21st century. That will inevitably create pressure for India to take on more of America’s present geopolitical burden. It should not do so. India has reasonably good relations with Russia and China and should maintain them while resisting American pressure for a partnership. Rather, India should lead an effort to reform the UN while associating with Asean, the EU and other multilateral bodies to create effective international institutions in place of great power hegemony.
Clyde Prestowitz is the author of Three Billion New Capitalists; Rogue Nation; and Trading Places. He is also president of the Economic Strategy Institute, Washington, DC. Formerly he was vice-chairman of the President’s Commission on Trade and Investment in Asia, a member of the Advisory Board of the ExImBank, and counsellor to the secretary of commerce (Reagan administration).